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Post-Keynesian Stock-Flow-Consistent Modelling: a Survey Downloaded from Eugenio Caverzasi and Antoine Godin*

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Post-Keynesian Stock-Flow-Consistent Modelling: a Survey Downloaded from Eugenio Caverzasi and Antoine Godin* Cambridge Journal of Economics Advance Access published July 23, 2014 Cambridge Journal of Economics 2014, 1 of 31 doi:10.1093/cje/beu021 Post-Keynesian stock-flow-consistent modelling: a survey Downloaded from Eugenio Caverzasi and Antoine Godin* The aim of the paper is to provide an overview of the current stock-flow-consistent (SFC) literature. Indeed, we feel the SFC approach has recently led to a blossom- ing literature, requiring a new summary after the work of Dos Santos and above http://cje.oxfordjournals.org/ all after the publication of the main reference work on the methodology, Godley and Lavoie’s Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. The paper is developed along the following lines. First, a brief historical analysis investigates the roots of this class of models that can be traced as far back as 1949 and the work of Copeland. Second, the competing points of view regarding some of its main controversial aspects are underlined and used to classify the different methodological approaches followed in using these models. Namely, we discuss (i) how the models are solved, (ii) the treatment of time and its implica- tion and (ii) the need (or not) for microfoundations. These results are then used in the third section of the paper to develop a bifocal perspective, which allows us to at Maison des sciences de l'homme on August 5, 2014 divide the literature reviewed according to both its subject and the methodology. We explore various topics such as financialisation, exchange rate modelling, policy implication, the need for a common framework within the post-Keynesian literature and the empirical use of SFC models. Finally, the conclusions present some hypoth- eses (and wishes) for the possible lines of development of SFC models. Key words: Stock-flow consistent, Post-Keynesian, Literature review JEL classifications: B5, C69, E12 1. Stock-flow-consistent models Recent post-Keynesian literature has witnessed the rise of a relatively new family of models: the so-called post-Keynesian stock-flow-consistent (PK-SFC) models. As we will show, the roots of these models date rather far back in time. However, only in the last 10 years have they seemed to attract a wider consensus, at least in the heterodox academic community. This paper analyses the most important contributions in this area of research, with a particular focus on the latest works. What we aim to obtain is a clear picture of the current state of the art of PK-SFC models as well as an improved understanding of their possible lines of development. Manuscript received 31 January 2013; final version received 18 November 2013. Address for correspondence: Antoine Godin, Kemmy Business School, University of Limerick, Limerick, Ireland; email: [email protected] * Marche Polytechnic University (EC) and University of Limerick (AG). We wish to thank Alessandro Caiani, Stephen Kinsella, Marc Lavoie, Edwin Le Heron, Marco Missaglia, Gennaro Zezza and two anony- mous referees for their valuable comments. As usual, all errors remaining are ours. © The Author 2014. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. Page 2 of 31 E. Caverzasi and A. Godin The outline of the paper is as follows. In this introductory section, we first present some of the most generic findings of our investigation. We then trace the steps that led to this class of model in a brief historical survey. The second section presents some of the methodological and theoretical debates about these models: the solution of the model, the role of time and the microfoundations. Sections 3–5 include a review of the most recent papers discussing PK-SFC models, divided according to their meth- odology and subjects: (i) theoretical models with a discursive solution, (ii) theoretical models solved via simulation and (iii) empirical models. The second group has been further partitioned according to the subjects treated. In this case, we individuated four macro areas: financialisation, open economies, policy implications and theoreti- Downloaded from cal debate. Finally, the conclusion uses the evidence emerging from the analysis of the previous sections to develop some hypotheses (and wishes) for the possible lines of development of PK-SFC models. 1.1 Graphical overview http://cje.oxfordjournals.org/ Before entering the core of our paper and analysing the characteristics of the PK-SFC framework, we would like to provide a rapid overview of some of the results of our investigation with the help of three graphs. Figure 1 shows the network of all authors cited in this paper.1 Each author is a node and each connection represents a paper co-authorship. We have highlighted in black all authors with five or more cited publi- cations. What emerges from this figure are two subnetworks: the first centred around the contributions of Wynne Godley, Marc Lavoie, Gennaro Zezza and Claudio Dos at Maison des sciences de l'homme on August 5, 2014 Santos, which we could characterise as the North American network, and the second emerging from the works of Jacques Mazier, Stephen Kinsella and Edwin Le Heron, which we could call the European network. It is important to bear in mind that this graph only provides for a partial representation of the links among authors. Indeed, the connections between points only represent co-authorships; other kinds of relations are not captured. Furthermore, the proximity in our network does not indicate actual vicinity, either geographical or otherwise. These deficiencies emerge as self-evident when looking, for example, at the European group that appears to be split. There seems to be an isolated ‘galaxy’ centred on Le Heron, while French scholars have in fact created a network of collaboration that goes beyond co-authorships. The second analysis we conducted, based on the bibliography we have gathered, regards the appearance of different assets and sectors. Indeed, while the first models were relatively simple, the development of the literature has witnessed an increase in the number of assets and sectors modelled. Figures 2 and 3 show the timelines of the appearance of each asset and sector, according to the network in which the paper was published. It also indicates the frequency of modelling: the darker the cell, the more frequently the asset/sector was modelled in that year. For example, in 2008, equities were more frequent than bonds in the same year or than equities two years before. The first observation to be made regards the age of each network. We see that the European network is much younger than its North American counterpart. As a result of this earlier start, the North American network shows more diversity in assets (Figure 2) and in sectors (Figure 3). However, we can observe that the European 1 All graphs presented in this section are automatically generated using the Bibliography as a database; the R source code is available from the authors upon request. Post-Keynesian stock-flow-consistent modelling Page 3 of 31 Downloaded from Fig. 1. Network of authors working in the SFC framework. http://cje.oxfordjournals.org/ at Maison des sciences de l'homme on August 5, 2014 Fig. 2. Assets’ appearance through time in SFC models. Note: Left, North American network; right, European network. The darker the cell, the more frequently the asset was modelled. network started diversifying assets and sectors from the beginning, while the North American network had a more incremental diversification. These timelines allow us to see not only the diversity of assets modelled, but also the trends. It seems that diversification is driven by real-life events, indicating that PK-SFC practitioners are using their models to try to understand these events. For example, in 2008, just after the burst of the housing bubble in the USA, we observe that the housing market is modelled. We observe that, at first, assets were not diversi- fied that much, but that the current crises compelled authors to develop more and more complex models of the financial market. The evolution of sectors presents a lower level of diversification than that of assets. This can be explained easily. An increase in the number of assets or sectors determines a significant amount of growth of the complexity of the models. It thus seems that the Page 4 of 31 E. Caverzasi and A. Godin Downloaded from http://cje.oxfordjournals.org/ Fig. 3. Sectors’ appearance through time in SFC models. Note: Left, North American network; right, European network. The darker the cell, the more frequently the sector was modelled. authors concentrated on modelling a more realistic financial market, rather than a more realistic productive structure or household structure. Nonetheless, the appear- ance of the differentiation between households and capitalists indicates that distribu- tive issues have been addressed. at Maison des sciences de l'homme on August 5, 2014 1.2 brief historical recollection The main characteristics of PK-SFC models will be extensively addressed in this paper, but for the moment we will try to describe their very basic characteristics, rap- idly answering these two questions: what are PK-SFC models? And where do they come from? With respect to the first question, we can say that PK-SFC models are a specific kind of post-Keynesian macromodel that follows distinctive accounting rules, ensuring the consistent integration of the stocks and flows of all the sectors of the economy. This led to reaching three important achievements: first, the consistency of the overall economy, since one sector’s outflow is always another sector’s inflow just as one sector’s liability is always another sector’s asset; second, the integration of the real and the financial side of the economy; and third, the construction of the long run as a chain of the short run.
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